Open Access
The propagation of uncertainty shocks : Rotemberg vs. Calvo
Loading...
Files
ECO_OH_2019_01.pdf (879.05 KB)
Full-text in Open Access
License
Cadmus Permanent Link
Full-text via DOI
ISBN
ISSN
1725-6704
Issue Date
Type of Publication
LC Subject Heading
Other Topic(s)
EUI Research Cluster(s)
Initial version
Published version
Succeeding version
Preceding version
Published version part
Earlier different version
Initial format
Author(s)
Citation
EUI ECO; 2019/01
Cite
OH, Joonseok, The propagation of uncertainty shocks : Rotemberg vs. Calvo, EUI ECO, 2019/01 - https://hdl.handle.net/1814/63144
Abstract
This paper studies the effects of uncertainty shocks on economic activity, focusing on inflation. Using a VAR, I show that increased uncertainty has negative demand effects, reducing GDP and prices. I then consider standard New Keynesian models with Rotemberg-type and Calvo-type price rigidities. Despite the belief that the two schemes are equivalent, I show that they generate different dynamics in response to uncertainty shocks. In the Rotemberg model, uncertainty shocks decrease output and inflation, in line with the empirical results. By contrast, in the Calvo model, uncertainty shocks decrease output but raise inflation because of firms' precautionary pricing motive.